One of the many chartered financial analysts writing for InvestorPlace is Mark Hake. He recently discussed why he feels Kensington Capital Acquisition Corp. (NYSE:KCAC) is undervalued by at least 35%. Put another way, Kensington Capital stock has 50% upside, possibly more.
Here’s why I believe he’s right on the money.
Innovation Out the Wazoo
This is only my second time writing about the special purpose acquisition company (SPAC) that’s merging with QuantumScape, the developer of a next-generation solid-state lithium-metal battery backed by both Volkswagen (OTCMKTS:VWAGY) and Bill Gates.
“Volkswagen is QuantumScape’s largest shareholder. They’ve been in business together since 2012, and in 2018 the two formed a joint venture to prepare for the mass production of solid state batteries,” InvestorPlace contributor Matt McCall wrote in early October.
“Volkswagen’s goal is to launch 70 EV models and produce 22 million units by 2029 — and QuantumScape’s technology can help it get there.”
This kind of potential market is why I was smitten by the company almost immediately. Anyone who believes in innovation would be too. It’s a game-changing technology that the world of electric vehicles badly needs.
How much of a game-changer?
According to InvestorPlace managing editor John Kilhefner, who spent a decade writing about technology until switching to the editing side of the desk a few years ago, QuantumScape’s solid-state glass batteries are much more efficient than traditional lithium-ion batteries.
“QuantumScape estimates its glass batteries can recharge to 80% capacity in just 15 minutes, producing enough power to work in both electric cars and trucks,” Kilhefner wrote in a recent contribution for Benzinga.
In my September article about Kensington and QuantumScape, I marveled at how tough the battery startup’s chief executive officer, Jagdeep Singh, is on electric vehicles and their ability to compete with internal combustion engine-powered vehicles.
He believes that EV manufacturers that use QuantumScape batteries will be more competitive than traditional ICE-powered vehicles. Clearly, so do Bill Gates and Volkswagen.
So, from that perspective, I don’t think there’s any doubt that KCAC stock is worth more than $12.57 a share as I write this.
Of course, you shouldn’t buy its stock just based on it pushing the innovation envelope. You also need the math to make sense. That’s where my colleague comes into play.
A Quick Valuation of Kensington Capital Stock
As I said in the beginning, Hake did a quick calculation of KCAC stock’s potential value in his Oct. 28 article about Kensington and QuantumScape.
Starting with a pro forma enterprise value of $5.03 billion post-merger, he uses future 2027 and 2028 revenue and EBITDA (earnings before interest, taxes, depreciation and amortization) forecasts from the company’s merger presentation slideshow — $3.21 billion in revenue and $808 million in EBITDA in 2027 and $6.439 billion in revenue and $1.62 billion EBITDA in 2028 — discounted to today’s dollars to arrive at a per-share value of $18.70.
Basically, he uses a 15% discount rate on $3.21 billion in revenue, which equals $1.2 billion. He then multiplies that revenue by a multiple of six, or $7.2 billion, and then adds back the $1.16 billion in cash brought into the merger, divided by approximately 447.6 million shares outstanding post-merger.
Bingo, Bango, you’ve got $18.70 a share.
The Bottom Line
Of course, Hake does provide a caveat.
“So putting this all together, I suspect that the Kensington Capital stock is undervalued by at least 35%. But it may take a while for the market to realize this. For example, it’s possible that it may take a year or two before the market believes that revenue will grow to be substantial by 2027 and 2028,” Hake stated.
Your biggest risk at this point is the opportunity cost of buying at $12.57 a share and seeing it go no place for the next two years. I’m not saying either of us believes this will be the case, but it could happen.
And that, more than anything, is the downside I see with investing in Kensington Capital stock. It’s a risk innovation investors ought to be willing to make.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.